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Kraft Heinz: Writedown and the SEC probe are actually worse than they look – The Kraft Heinz Company (NASDAQ: KHC)



Kraft Heinz (KHC) left investors shocked after announcing a major loss in the fourth quarter of 2018, fueled by the stunning 15.4 billion dollars written off to a number of its brands. The company also reveals an investigation by the SEC in its accounting practices.

The market sends shares sinking as a result of the news. Several fearless investors have proposed buying a dip, but we are not so sure. In fact, the world's fifth-largest food and drink company can upset investors' stomachs even better. A closer look at both the investigation and the investigation of the PEC shows that things can actually be worse than they seem to be.

Based only on pure size, the landmark of Kraft Heinz is remarkable. In the value of $ 15.4 billion, this is the seventh largest impairment since 2009. The write-off is from two sources: $ 8.3 billion from write-off of intangible assets of the Kraft and Oscar Mayer brands and $ 7.1 billion from goodwill impairment for the North American cold and trading business.

But the size is not a problem here. The reason why this record is so unusual is that it seems to have come virtually out of nowhere. Kraft Heinz conducts regular assessments of its various business units, including an annual impairment test. This leads to a fairly regular recognition of the impairment of goodwill, with the accompanying adjustment of the balance sheet.

Kraft Heinz traditionally performs its main testing for impairment in the second quarter of each year and 2018 is no exception. When the company reported a profit for the third quarter, it recognizes significant impairment costs:

"We test the goodwill for impairment at least annually in the second quarter or when an event occurs." As a result of our annual impairment test for 2018 , we recognized a non-monetary loss of $ 164 million in SG & A related to our reporting unit in Australia and New Zealand, with the impairment loss mainly due to a decline in the region's margin of 509 million dollars In addition, five of our 20 reporting agents were above fair value above the book value of less than 10%, with US $ 4.7 billion for Canada retail, $ 424 million for Latin America exports, $ 407 million for North East Asia, 326 million for Southeast Asia, and $ 232 million for other Latin Americans.

When "five out of 20" of its reporting agents apparently carry a significant surplus, there was always a chance that things would get worse. But in order to change the situation so dramatically in less than six months, it is shocking. It is clear that Kraft Heinz was either removed from the blue, or was restrained to acknowledge the true extent of the damage so far. Although the company can try to make sure it is a one-time adaptation, the fact that it has not been telegraphed – and has been activated for so short a time – should be seen as a serious red flag and a warning sign that this may

Deleting is not the only thing that investors have blinded this week. Kraft Heinz also revealed that her accounting practices have been subject to SEC control and have been subpoenaed by the regulator. The company said it had launched its own internal investigation in response to the SEC's investigation, recording an additional $ 25 million:

"Following the initial request for an SEC document, the company together with external lawyers launched an investigation into public procurement. quarter of 2018, as a result of the findings of the investigation, the company recorded an increase of $ 25 million in the cost of products sold as off-season adjustments as the Company determined the amounts for minor for the fourth quarter of 2018 and the interim and annual reporting periods to date 2018 and 2017 are undergoing some improvements in internal control to reduce the likelihood of this occurring in the future and to take other corrective

While the SIS investigation is never something like an investor wants to see, yet Kraft Heinz sounds like it does everything in the right way: cooperation, initiate an internal investigation, promptly r zpoznavane adjustment costs and promising new controls to prevent recurrence of errors. So far, so good.

But, again, there is another thing in this story if we dig a little deeper. According to the company's own schedule of events, SEC seems to have sniffed around for reasons other than the 25-million-dollar correction reported for the quarter. Audit Analytics, a specialized research apparel, concludes that history is far from over:

"In other words, there was another unresolved issue that triggered the SEC's review

If there is still an investigation into the PEC, is not over, it could mean even worse surprises on the way.

Kraft Heinz was a huge 27.5% on Friday amid a fall in analysts. makes us smell for the possibility of buying, but in this case, however we see that there may be more trouble

The core business has obviously done a serious blow, and myopic focusing on cutting costs has led Kraft Heinz to lose focus on maintaining its brands even when consumer tastes continue to change. Its current brands fail to resonate with a new generation of users, but has not succeeded in introducing new and profitable requirements.

Kraft Heinz has promised a return to strong revenue growth and improved margins, focusing on improving its brands, consolidating its market positions and building new opportunities. Given the rapid development of the consumer market, these promises seem a little dubious.

And even if the company goes through its operative promises, other issues are hiding below the surface. Additional brand damage can affect the stock price and, given the latest surprise, there is no reason to be confident that this is the last significant loss in the cards. The SEC investigation reveals even more red flags. That's a big question, and Kraft Heinz has done a bit to calm the fears of investors so far.

While investors may think that this downturn has to be bought, we will stick to the sidelines until we get more clarity about the company's prospects in the rapidly changing world.

Disclosure: I / We have no positions in these stocks and I do not intend to initiate any positions in the next 72 hours. I wrote this article and she expressed my own opinion. I do not get compensation for him (except from Seeking Alpha). 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